Last week April’s raft of UK PMIs bettered expectations, temporarily easing fears over the underlying health of the domestic economy. A solid uptick in the service sector in particular helped to boost the Pound, given that it accounts for more than three quarters of UK economic growth. However, the details of the surveys pointed towards a continued acceleration in inflationary pressures, suggesting that the outlook remains troubled. Even so, the GBP ZAR exchange rate made some solid gains in the wake of the data.
A general decline in market risk appetite weighed heavily on the Rand, meanwhile. Following a better-than-expected ISM non-manufacturing index and Wednesday’s Federal Reserve policy meeting, investors were encouraged to pile back into lower-yielding assets. As markets raised the odds of a June interest rate hike from the Fed to a near-certainty the mood towards the Rand soured, particularly as jitters over the French presidential election also remained.
Rand Struggles Amid Faltering Risk Appetite
Although markets were relieved once centrist Emmanuel Macron secured the French presidency, this respite ultimately proved short-lived. As a result the GBP ZAR exchange rate returned to an uptrend during Monday’s European session. While the threat of a fresh populist upset faded, doubts remain over Macron’s ability to deliver on his campaign promises, with the future of the global economy still far from secure.
The commodity-correlated Rand also came under pressure at the start of the week thanks to a raft of disappointing Chinese trade data. As Chinese imports slowed further than forecast this raised concerns over the health of the world’s second largest economy, undermining metal prices on the prospect of reduced demand.
This overshadowed a modest uptick in South Africa’s foreign exchange reserves, with confidence also dented by rising political tensions within the country.
Confidence in the Pound, meanwhile, was boosted by a surprisingly large rebound in the British Retail Consortium (BRC) like-for-like sales on the year in April. While this increase was largely attributable to the timing of the Easter holidays, the GBP ZAR exchange rate still picked up in response. However, the BRC noted that trends continue to point towards an ongoing slowdown, with rising inflation and Brexit uncertainty set to weigh on consumer spending.
BoE Inflation Report Could Increase Pressure on Sterling
Further volatility is likely for the GBP ZAR exchange rate ahead of the Bank of England’s (BoE) May policy meeting. Investors are hoping to see some signs that policymakers are adopting a more positive outlook on the economy, potentially boosting the chances of interest rates being raised sooner rather than later.
However, if the BoE maintains its neutral stance on monetary policy then the Pound could trend lower. Focus will also be on the quarterly Inflation Report, which could add to expectations that inflation will continue to accelerate over the course of the year.
South African mining and manufacturing production figures may dent the Rand if output is found to have slowed in March. Any signs that the domestic economy is in less-than-robust health are likely to reduce the appeal of the Rand, particularly if the wider market mood remains risk averse. If commodity prices continue to weaken then the GBP ZAR exchange rate could benefit further.